Trustees face a ‘divestment dilemma’ when seeking to mitigate the risks posed to UK pension schemes by climate change, according to a new paper published by Aon.
This report explores in more detail the challenges faced by trustees, and the options available to help them navigate these complex issues.
It says the question of divestment — the act of selling and excluding future holdings in certain investment areas — has become a key topic of discussion, particularly with concerns that this could lead some schemes holdings ‘stranded assets’. These are assets that are worth less than expect, and may be less than the required level of return to a scheme. Often these are related to fossil fuels and company involved in industries with a high carbon footprint.
Aon’s paper, ‘The Divestment Dilemma – Helping investors navigate the challenge’, says that in the worst case scenario there is the potential for these assets to become worthless, while potentially incurring additional costs for their disposal.
Aon associate partner Jennifer O’Neill says: “Divestment is not a binary issue. As with any strategic investment decision, understanding the ultimate objective and a scheme’s priorities, influences and perception of risk, will impact the ability to make better decisions.
“With increasing expectations from regulators for greater transparency and with scheme members seeking to understand the approach taken by trustees to mitigate climate risk, many UK pension schemes have already committed to a range of divestment, engagement or hybrid approaches.
“Divestment should now be considered as part of a scheme’s overall climate risk approach – which is broader than just reviewing their investment in fossil fuels. With this paper, we have aimed to explore the issues that are now emerging, while also outlining some guidance and potential courses of action that can enable schemes to address them as part of their overall Responsible Investment approach and as they continue to navigate the volatility of climate risk.”